The difficulties of mining in Africa

Mining companies looking to do business in an African country need to be aware of the complexities they will likely face – from securing debt financing, to political risks in complying with local anti-bribery laws.

“What are the mandates that I’m seeing in Africa?” Martin McCann, Norton Rose’s head of infrastructure, mining and commodities, asked in a recent seminar titled “Mining in Difficult Jurisdictions” at the international law firm’s Toronto office. “There has been a shrinkage in the number of banks offering project financings to greenfield projects,” he continued, explaining that when he led the project financing for Equinox Minerals’ Lumwana copper mine in Zambia, around 20 lenders offered US$50 million to US$100 million in debt in African countries. 

But with that number now as low as eight, and with even fewer truly active lenders, McCann said companies need to consider other options to secure the required debt. Some banks provide a portion of the required debt, or only lend if the company is backed by an export credit agency (ECA). 

Companies can consider an ECA loan to boost the amount of debt it secures. Most countries that are part of the Organization for Economic Co-operation and Development (OECD) have ECAs, which are official financial institutions that support exports and foreign direct investments and provide political or commercial protection. 

McCann said that over the last two years China’s ECA, Sinosure, has been the biggest supporter of mining projects in Africa. 

“The world has been dominated by Chinese investors, particularly down the east side of Africa, and all of Australia,” McCann commented. 

Other ECAs that support mining projects include: South Africa’s ECIC, Australia’s EFIC, Korea’s K-sure and Japan’s JBIC.

“People are now looking to go to these ECAs to get some equipment and see if they can then get some soft protection from the banks for an increased debt amount,” McCann said. 

Although Sinosure is dominating the playing field, he noted that for a junior, Chinese financing has been difficult to land. But for the mid-tiers and seniors there has been real liquidity. One reason why the juniors have been left out is because mining deals backed by Sinosure often involve a parent company, which juniors usually lack. 

If companies can’t access debt through ECAs, they can tap into a development finance institution, which would be easier to access but a lot slower. 

Other options include equipment financing and offtake agreements for the project’s primary product and possible by-products. 

But before all these financing arrangements are made, a company should understand the operating environment of the country they are in, said Norton Rose’s corporate lawyer Poupak Bahamin, who specializes in mergers and acquisitions.

 “The reality is that carrying out business in a developing country does add a layer – well, several layers of complexities to any mergers and acquisitions or financing transactions that you would be used to here,” she noted.

 Bahamin, who worked in a number of African countries including the Democratic Republic of the Congo, Angola and Cameroon, said everyone knows what political risk is, but no one knows how to handle it. It can’t be controlled by an investor or a party, she added. 

Bahamin suggested that companies can buy political risk insurance, but conceded that doesn’t offer a “perfect solution” in ensuring financing or covering all risks. 

Risks cover a gamut of country and project factors such as political instability, unpredictable policy, currency fluctuation, asset expropriation, legislative change and raising taxes and royalties. 

A company can help safeguard itself by understanding the operating and local environments. This means complying with the country’s judicial system and knowing if any restrictions exist on foreign ownership when it comes to holding a licence, exiting the project or transferring production and capital out of the country.

 There’s a lot of due diligence to be done where lawyers can help navigate bureaucracy, such as reviewing all relevant constitution legislation, financial acts, mining regulations and company and employment laws. 

“You have to go in eyes wide open,” said Norton Rose’s Pierre Dagenais, who practices corporate and securities law. 

This also applies for a company taking an equity interest in a Canadian public company with a mining or exploration property in Africa. When you are dealing with an exploration property, you need to understand what the property is, Dagenais said. You need to know how long the licence or lease is for, and what it entitles you to do. Conducting site visits for technical diligence will also help form a clear picture. 

Some non-financial risks in Africa involve corporate social responsibility and anti-bribery – or anti-corruption – laws. 

Those laws are legislated by OECD countries, and apply to companies that have connections to those countries despite where they work, Norton Rose’s Michael Torrance said. 

A Canadian company may find itself in a sticky situation when “grease payments,” or bribes, are expected, but they could lead to criminal penalties and heavy fines.

Some exceptions to the law exist, said Norton Rose’s Dawn Whittaker, a securities and mergers and acquisitions lawyer, adding that “there’s no magic answer.”

 “The law is the law here, the law is the law there,” she said. “If the cost of compliance is more expensive than the cost of paying the bribe, it’ll absolutely drive up the cost of doing business.”